Consumer Car Buying Advice Blog

There is an easy way people with bad credit can reduce the interest charges on just about any bad credit car loan

Take it from us

At Auto Credit Express we’ve spent the last 20 years working with consumers who have bad credit by directing them out our online bad credit auto loan application and financing a vehicle through our nationwide network of dealers that specialize in second chance auto loans. Unlike tote the note dealers, the lenders these dealers work with report to the credit bureaus and can help them reestablish their car credit and raise their FICO scores.

In working with credit-challenged consumers we have come to believe that one of the keys to successfully reestablishing your auto credit is an understanding of the bad credit auto loan procedure. Here are some facts: a bad credit car loan means you’ll pay a higher rate of interest than a regular car loan. These high interest rates mean more money out of your pocket just to finance your vehicle.

However, there are strategies that you can use to reduce the amount of money you pay in interest charges. Here is one of them.

Adjust the loan term

Although it may sound overly simple, one of the surest ways to reduce interest charges is to shorten the length of the loan. While a shorter loan term will increase the amount of your monthly payment, it will also lower the extent of interest that you pay on the loan.

For example, if you finance a car with a selling price of $15,000 plus tax (7%), fees of $120 (non taxable), and a down payment of $2,000, the total amount to finance works out to $14,170 (you can duplicate this process by going to our loan calculator).

If you finance this amount for 60 months, your payment would be, on average, about $337 per month. The amount of interest that you would normally expect pay over the life of this loan would be $6034.

If you were to reduce the loan period to 48 months, the monthly payment would increase to $394 (about $2 a day), but the amount of interest you’ll pay over the life of the loan would drop to $4742 – a decrease of almost $1300 ($27 per month, on average) when compared to the five year loan (you can also verify this with our loan calculator).

Avoiding negative equity

In addition to reducing interest expenses, there is another big benefit to shortening the loan term.

It’s common knowledge that a car drops in value as soon as you drive it off the lot. Without a hefty down payment, it is difficult to make up this difference on most vehicles until you are two-thirds of the way through the loan period. In fact, if you owe more on your car that it appraises for when you need to trade it in, you have what is known as “negative equity”. This means the book or auction value of the car is less than what you owe on the finance contract.

The solution to this problem is simple: by shortening the loan term and paying more each month, you will substantially reduce this spread in negative equity, especially during the early portion of the loan. This means that, with a shorter loan term, when you are ready to trade in you car in a year or two for a different vehicle and at a lower interest rate, you will either have less negative equity or, possibly, even real equity in your trade-in.

In other words, by financing for a shorter period of time, you have turned a negative situation (no equity or negative equity in your vehicle) into a positive situation (no negative equity or possibly even trade equity in your vehicle).

In conclusion

If you need to get a car with auto loans for bad credit, you should be looking at the process as a stepping stone to better credit. Finance the car for the shortest loan period that you can afford. Make your payments on time and use this as a step in reestablishing your credit.

Auto Credit Express has helped thousands of people with bad credit buy cars and reestablish their auto credit at the same time. Our nationwide network of affiliate dealers specializes in bad credit car loans.

So if you are serious about getting your credit back on track, you can begin the process right now by filling out our secure online bad credit car loan application.

Tags: auto credit, Bad Credit, car credit, credit, fico, FICO score, tote the note

This entry was posted and is filed under Auto Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.